Coronavirus FAQS For Employers: Force Majeure Contract Provisions

COVID-19, and the measures taken to contain it, continue to have a seismic effect on our economy and, in particular, on businesses that have had to reduce or halt operations.   Many businesses are unable to perform existing contracts, or have suppliers or vendors who cannot perform.  The situation has caused many businesses to focus on a common contract provision which, in better times, might have seemed mere boilerplate, the force majeure provision.  Such provisions, when properly invoked, provide relief from ongoing performance of contract obligations.

What is a force majeure provision?

A force majeure provision in a contract excuses one or both parties from carrying out their duties under the contract upon the occurrence of an event that was not anticipated and that could not be prevented.

What is a force majeure?

A force majeure is an event that could not have been anticipated, was beyond the control of the parties to the contract, and materially affected the ability of a contracting party to carry out its obligations under the contract.  Contracts often list the types of specific events that will relieve a party’s obligation under the contract.

Is the COVID-19 virus a force majeure?

The answer depends on the specific language of the contract.  If the contract’s force majeure provision mentions pandemics, epidemics or quarantines, then yes.

If the contract’s force majeure provision does not mention pandemics, epidemics or quarantines, then the answer depends on whether there is other language in the provision from which a Court would find the parties intended that the provision would apply to the pandemic.

In either case, a party seeking to avoid performance of the contract must show that the COVID-19 pandemic materially affected the party’s performance and that it took reasonable efforts to respond to the pandemic.

Is the COVID-19 virus an “act of God”?

Some force majeure provisions refer to the qualifying events as “acts of God.”  Generally, acts of God are understood in contract law as events not caused by human action, such as natural disasters, but the term is not used consistently by contract drafters.  If the contract does not specifically provide that a pandemic or epidemic is an act of God, a Court may have to determine whether the virus qualifies as an “act of God” under the terms of the contract.

What relief does a force majeure provision provide?

Force majeure provisions generally describe the relief available when a qualifying force majeure event occurs and prevents or delays performance.  The relief can take many forms.  The provision may provide an extension of time to perform, it may provide for a monetary adjustment to the parties’ bargain, or it may allow for contract termination.

What does a party seeking to invoke a force majeure provision need to show?

First, it will be the party’s burden to show that the event was a qualifying event under the specific terms of the contract’s force majeure provision.

Second, the party seeking must show that it took reasonable steps in response to the event in order to continue performance.  These might include finding alternative sources of supply, arranging work arounds, etc.

Third, the party must prove that its performance of the contract was materially affected by the qualifying event.  The fact that performance was made more difficult or expensive will not suffice.  There must be a more direct cause and effect link between the event and the inability to perform.  For example, a supply chain breakdown for materials that could not be obtained through other channels.

Fourth, the contract may also contain a requirement that notice be given within a specific time period to the other party.   Even if there is no notice provision, it is best to notify a contracting party as soon as possible that your performance of the contract is being materially affected by the qualifying event.

A party seeking to invoke force majeure remedies should read the contract carefully and comply with all requirements contained in the force majeure provision.

If my contract does not contain a force majeure provision, can I still be excused from performance based on COVID-19?

In the absence of a contract provision, there may be other defenses available to excuse a party’s inability to perform.  Under general contract law, a party may be excused from nonperformance of a contract if an event occurs that was unforeseen, not the fault of the party, and makes performance impossible.  The availability of this defense depends in part on the nature of the intervening event and its relation to the party’s expectations and obligations.

Do I have to invoke the force majeure provision to avoid waiving rights?

You may decide that trying to renegotiate with your contract partner is a better alternative than taking advantage of force majeure remedies.  Parties to a contract are free to enter into new agreements or to amend their contract, though the original contract may require that the amendment be in writing.  But you should make sure that at the same time you do not waive rights available under the force majeure provision, in case negotiations fail.  You should speak with counsel about how to make sure your rights are preserved in this scenario.

What if the other party to my contract provides notice that it is invoking a force majeure provision?

You should review the contract carefully to determine if the other party has properly invoked the provision.  For example, is the event claimed qualify under the terms of the contract?  Did the other party provide notice in the timeframe and manner required under the contract?  Did the event really prevent performance and did the other party take reasonable steps to avoid the failure to perform?

If this contract affects your ability to perform contracts with other parties, you may need or want to notify those parties of this development. Contact Stacey Nakasian at Duffy & Sweeney to learn more here.

Or visit Duffy & Sweeney’s COVID-19 Resource Center here.